The Ultimate Guide to Third-Party Logistics (3PLs)

A significant portion of any company’s business involves fulfilling customer orders. The order fulfillment process begins when the customer places an order and ends when the order arrives that their doorstep.

What seems like a simple process can actually become quite complex depending on the storage location of your company’s inventory, the location of the customer, the size of the order, and the timetable for delivery. When you factor in the potential for returns, it becomes even more complicated.

When a business grows beyond its capability to manage order fulfillment in-house, it might be time to consider outsourcing certain functions to a third-party logistics provider or 3PL provider.

Keep reading to learn everything you need to know about third-party logistics.

What is Third-Party Logistics?

Third-party logistics involves three parties – the business, the logistics provider, and the shipping carrier. In the simplest of terms, a third-party logistics provider offers logistics services to manage certain aspects of a company’s shipping operations.

In most cases, a 3PL becomes integrated into the company’s inventory storage and transportation procedures. Rather than storing, packaging, and shipping orders themselves, companies can hire a 3PL to manage the logistics of the entire process. The 3PL owns or leases its own storage and transportation assets, using them to fulfill the client’s orders from a remote location. By handing over management of order fulfillment logistics to a third-party provider, companies are able to focus more on the factors that will help them grow and develop their business.

The third-party supply chain model was developed in the 1970s when intermodal marketing companies began receiving packaged loads from shippers and handled the transportation of those loads to railroads for delivery. In the decades since, the process has become refined and modernized with 3PL software that simplifies and streamlines the whole process both for 3PLs and the companies that hire them.

What Services Does a 3PL Provide?

A 3PL has the ability to scale and customize its services according to the client’s specific needs and the client still retains some degree of oversight when it comes to managing shipping operations. Before signing a contract, you have the ability to outline exactly what services you want the 3PL to provide and what services you will retain in-house. As your business grows and changes, your 3PL provider can take on a greater role by adding additional services or by expanding operations as a whole.

Here is an overview of services a 3PL typically provides:

Warehouse Storage – Hiring a 3PL saves you from having to find storage space for all of your inventory. Many 3PLs offer shared storage, managing order fulfillment for multiple clients out of one physical location to maximize efficiency and keep costs down.

Inventory Distribution – Many 3PL providers manage multiple warehouse locations so your company’s inventory can be distributed across several fulfillment centers for fast shipment to different parts of the country. With the right technology, a 3PL can automate the fulfillment process, automatically routing orders to the best fulfillment center.

Picking and Packing – In addition to storing your company’s inventory, a 3PL provider has staff in place to perform the specific tasks associated with order fulfillment including picking the products in each order and packaging them appropriately for shipping.

Freight Forwarding – Once the products are picked and packaged, the 3PL forwards them to a shipping carrier for delivery. Different 3PLs work with different carriers and a good 3PL will choose the one that offers the best combination of price and delivery speed.

Expedited Shipping – Working with a 3PL enables your company to offer expedited shipping options to your customers because fulfillment centers send out orders on a daily basis – much more frequently than you would be able to offer if you handled orders in-house.

Shipment Tracing/Tracking – In addition to handling the shipping process, a 3PL will also manage the tracing and tracking process. Customers will receive shipping information, so they can easily track their order throughout the order fulfillment process.

Reverse Logistics (Returns) – Not only do 3PLs offer shipment services, but they can also provide reverse logistics to handle returns. A 3PL has the ability to provide customers with return labels so they can drop the item off with a carrier for return to the fulfillment center.

Again, when you sign a contract with a 3PL provider, you have the ability to customize its services according to your business’s needs. An experienced 3PL provider will be able to handle the logistics of the entire supply chain from the moment your customer submits their order to the moment it arrives on their doorstep.

To help you understand what this looks like, here is an outline of the order fulfillment process from a third-party logistics provider’s perspective:

Step 1: Receiving – A 3PL can’t fulfill customer orders if they don’t have inventory, so the first step in the process is moving your inventory to the 3PL’s warehouse. Depending on the size of your business, your inventory may be divided among several fulfillment centers, so orders can be fulfilled more quickly and efficiently. Each 3PL has its own process for receiving and storing inventory and most providers are able to customize this service according to the client’s needs.

Step 2: Picking – After a customer places an order, the next step is for the 3PL to begin fulfilling the order by “picking” the item. Depending on the type of integrative technology the 3PL offers, this information can be automatically sent to the 3PL or you might have to upload orders to their system manually. When the order is received, the 3PL’s picking team collects the item then passes it to the next stage of the supply chain for packaging.

Step 3: Packing – Once all items in an order have been picked, they are packaged for shipping. Depending what options for customization your 3PL offers, you may be able to choose the packaging for your orders. Otherwise, standard packaging materials typically include unbranded boxes, bubble mailers, poly bags, packing tape, and bubble wrap. Some 3PLs will charge for packing materials while others include them in their fulfillment services. A good 3PL will choose the best materials to protect the product while achieving the lowest practical dimensional weight to keep shipping costs down.

Step 4: Shipping – After the order is picked and packaged, it is forwarded to a shipping carrier. Some 3PLs have a preferred shipping carrier while others compare costs to choose the best combination of price and delivery speed. In most cases, shipping carriers pick up orders from the 3PL’s warehouses.

Step 5: Returns – Not all orders end when the shipment hits the customer’s doorstep. Returns are a major concern for many businesses and they can get messy if you are trying to manage a large stock of inventory on your own. When you hand over this aspect of the supply chain to a 3PL provider, all returns are directed back to the 3PL where they are processed, restocked, or disposed of according to your company’s policy. You can even choose to have your 3PL provider provide shipping labels for your customers to streamline the process and to enable them to track the status of their return.

By now, the benefits of a third-party logistics partnership should be obvious, but how do you know whether your company can benefit from such a partnership? Keep reading to learn the signs that it’s time to hire a 3PL.

When Do You Need a 3PL?

Unless you’re running a small retail business out of your garage with no more than a dozen orders a week, the chances are good that your company could benefit from hiring a third-party logistics provider. To help you decide, here is an overview of the benefits associated with working with a third-party logistics provider:

It will save you time. By outsourcing your company’s logistics, you will have more time to focus on the things it takes to grow and expand your business.

It could save you money. A 3PL has the ability to package warehousing, shipping, and inventory management all for one price and it could be lower than doing it all in-house.

It puts the burden in someone else’s hands. Handing over your company’s logistics to someone else can be nerve-wracking but it means that someone else will be accountable.

It helps your business stay up-to-date with technology and regulations. A good 3PL stays up-to-date with the latest technology and industry regulations which means that you don’t have to.

It will be done correctly and efficiently. A 3PL exists to offer the best services at the greatest value – that’s how they get and retain customers, and that value is passed on to you.

It can be customized to your needs. When it comes to warehousing, shipping, and distribution a 3PL provider can customize its services according to your needs and can adjust as you grow.

It gives you access to better resources. Hiring a 3PL gives you access to the best inventory management software and other integrative technology that you might not get on your own.

It expands your reach. A 3PL provider has a network of partners including shipping carriers and other providers to ensure that you get the best services at the lowest rate possible.

It reduces your risks. By outsourcing your company’s logistics you don’t have to worry about things like labor risk and the financial risk of investing in equipment and storage facilities.

Still not sure whether hiring a 3PL provider is the next logical step for your business? Here are some of the top signs that your business could benefit from hiring a third-party logistics provider:

You’re shipping more than 100 orders per month. There is nothing magical about the number “100” – the point is that your company is receiving more orders than you have the capability to efficiently manage in-house. As your company grows and your inventory increases, you’ll find yourself spending more time and energy fulfilling orders than actually focusing on your business – that’s when you know it is time to hire a 3PL.

You’ve run out of storage space for your inventory. The goal of any retail company is to have enough orders that it becomes necessary to expand your inventory. Of course, when this happens, you’ll need space to store all of that extra inventory. Rather than dealing with this predicament each time you add a new product to your store, turn over storage logistics to a 3PL.

You want to offer your customers expedited shipping. If you’re currently managing your order fulfillment in-house, you may be struggling to make it to the post office even once a day, let alone often enough to give your customers expedited shipping options. With a 3PL handling your order fulfillment logistics, you’ll suddenly be able to offer one-day, two-day, and maybe even same-day delivery.

You want to save money on storage and shipping. Hiring a 3PL provider is by no means cheap, but it could save you a lot of time and money if done correctly. If you find yourself wondering whether it is worth spending the capital to lease a warehouse space, consider hiring a 3PL instead and put that capital to better use expanding your business.

You want your company to have room to grow. The hallmark of any good businessman is forward thinking. From the moment you start your business, you should have some idea where you want to go and how you want to get there. If you want to expand your offerings throughout the country or internationally, a 3PL can help you get there with inventory distribution services.

Hiring a 3PL provider to manage the logistics of your supply chain is a smart move if any or all of the signs above are coming into play. Before you start shopping around for a 3PL, however, you should take a moment to consider whether doing so is enough. You may want to think about taking things one step further and hiring a fourth-party logistics provider – keep reading to learn more.

What’s the Difference Between a 3PL and 4PL?

First and foremost, you should know that both 3PLs and 4PLs are professional hired services that help businesses like yours plan and execute the logistics of inventory management and order fulfillment.

As you well know by now, a third-party logistics provider is a company that handles the logistics of your company’s supply chain and order fulfillment processes. Depending how much control you want to hand over to your 3PL, they can do everything from storing and managing your inventory to picking, packing, and shipping your orders. They can even handle the returns process for you.

So, what is a fourth-party logistics provider and how does it differ from a 3PL?

A fourth-party logistics provider adds another element to the equation, bringing together various resources and technologies to optimize the design and execution of your supply chain. You can still keep your 3PL to manage the day-to-date details of order fulfillment, but a 4PL will become the “control tower” that oversees all aspects of your company’s logistics. They will supervise your 3PLs along with any other resources or providers you use to ensure that your supply chain operates smoothly, efficiently, and in a cost-effective manner.

The key difference between a 4PL and a 3PL is that many 3PLs are asset-based – they own or lease equipment and warehouses that they use to provide services. As such, a 3PL is concerned with its own costs and may not always seek out the best deal for you if it means a better deal for them. In contrast, a 4PL’s only concern is integrating and optimizing your supply chain.

The Different Types of 3PL Providers and Pricing Models

A third-party logistics provider can offer a wide range of services, though many of them focus on a specific aspect of the supply chain process. As a business, this might mean hiring multiple 3PLs to fulfill the different aspects of your supply chain – this is when hiring a 4PL may come in handy.

Here is a quick overview of the different types of 3PL providers you may come across:

Transportation – This type of 3PL specializes in transporting inventory between locations, e. shipping. When choosing a transportation 3PL provider you’ll need to consider various factors such as the location of the company, the location of your customers, delivery timeframes, shipping methods, service options, and pricing and discounts.

Warehousing/Distribution – The most common type of 3PL is warehouse- and distribution-based. These providers handle the storage, shipment, and returns of your orders. When considering a warehousing 3PL, you’ll need to consider the number of locations and their geographical locations, the pricing model for storage, negotiated shipping rates, delivery insurance, daily cutoffs for order fulfillment, and management tools.

Financial/Information – Once your company expands beyond the eight or nine-figure mark in annual revenue, you may want to bring a financial 3PL on board to help you optimize your operations for the industry and to evaluate current trends. These 3PLs offer services such as freight auditing, cost accounting, bookkeeping, tracking, tracing, and inventory management.

Now that you have a better understanding of the different types of 3PL providers, you may be wondering how much it costs to hire a 3PL. Third-party logistics pricing depends on the services you require as well as the scope. Here are some of the factors that determine 3PL pricing:

Onboarding – The process to get a 3PL partnership up and running can take anywhere from 3 to 6 months, so some companies charge onboarding fees to get your company set up with integrated technology to manage order fulfillment services.

Inventory Receiving – Before a 3PL can start managing your supply chain, they need to receive your inventory. Some companies charge per-unit or per-pallet while others charge by the hour or a flat rate for receiving and storing inventory.

Inventory Storage – Different 3PLs offer different storage fees depending on the warehouse. For shared storage, you may be charged a lower rate but will share the fulfillment center with other companies. You may be charged per-item, per-bin, per-shelf, or per-pallet for storage.

Order Picking and Packing – Many 3PLs charge a fee for picking each item in an order while others include this cost in the total order fulfillment price. Some companies offer discounted rates for orders under a certain number of items.

Packaging – Some 3PLs include packaging materials in their shipping costs while others charge a fee. You may have the option to customize your packaging materials, or you may not.

Kitting – This refers to any unique accommodations you request for assembling, arranging, or packing orders prior to shipping. Fees vary according to your individual needs.

Shipping – Most 3PLs have relationships with shipping carriers to reduce their owns costs which means greater savings for you. These costs take various factors into account such as shipping speed, shipping zones, and the dimensional weight of packages.

In addition to considering these individual costs, you should also know that most 3PLs offer three pricing models. Here is a quick overview:

Total Fulfillment Cost – This pricing model reflects the total fulfillment cost for direct-to-consumer orders, charging only for receiving, storing, and shipping inventory instead of charging fees for individual services.

Fulfillment by Amazon – Abbreviated to FBA, fulfillment by Amazon is model in which products are sold on the Amazon marketplace and orders are fulfilled by Amazon. Because Amazon receives a cut of every sale, they are able to offer discounted fulfillment fees. This offer is convenient for some companies, but for others, it means sacrificing a portion of profits and losing the ability to highlight their brand. Amazon also charges long-term storage fees for unsold items.

Pick and Pack – As you can guess from the name, this pricing model is based on individual charges for each item picked and packaged. Most 3PL providers charge between $0.15 and $5.00 for each pick, so costs can add up quickly with this pricing model.

When choosing a 3PL provider, you need to consider all aspects including costs. Keep reading to receive some additional tips for choosing a 3PL provider.

Tips for Choosing a 3PL Provider

If you’ve decided that hiring a third-party logistics provider is the next logical step in expanding your business, congratulations! Now comes the hard work – choosing the perfect provider to meet your business’s current needs while offering room for growth.

Here are some simple tips to keep in mind when choosing a 3PL provider:

Ask the provider if they have an enforceable non-disclosure agreement (NDA).

Take a look at the company’s track record in terms of financial stability and client satisfaction.

Consider the company’s hours of operations including weekends and holiday hours.

Ask what services the company provides and which, if any, they consider their specialty.

Once you’ve narrowed down your list to a few different 3PL options, it’s time to start digging deeper to find the best match for your company. Before talking to any company in depth, make sure they have and sign a non-disclosure agreement to protect your company. In addition to talking to the 3PL’s representatives, you should also ask for references in the industry to help you determine whether the company has a solid track record and a positive reputation. Over time, it will become clear whether any of the 3PLs on your list are the right fit for your company or not.

Finding the right 3PL provider that will keep your company’s best interests in mind may not be a quick and easy process, but it is important that you do it right.